Time Is on Your Side With Kronos

Editor's note: An earlier version of this article stated that Sherwin-Williams licensed DuPont's pigment manufacturing process and plans to build a plant in Ohio, which is incorrect. The Fool regrets the error.

Back in 1964, The Rolling Stones hit the charts with "Time Is on My Side." Anyone who has seen Mick Jagger or Keith Richards lately might question the validity of the sentiment expressed in the song. Long-term investors, though, certainly hope the idea is still applicable today. One company with time on its side in my view is titanium dioxide producer Kronos Worldwide (NYS: KRO) . Here's why.

PricesKronos' shares have surged largely due to a major increase in titanium dioxide prices beginning in 2010. Costs of the pigment used for whitening doubled from 2009 through 2011. Other titanium dioxide producers like DuPont (NYS: DD) and Huntsman (NYS: HUN) also benefited from the trend, although not as much as Kronos.

Titanium dioxide prices continued to rise in 2012, although at a more moderate pace. To put the impact of these prices into perspective, consider that Kronos' sales volume decreased in the second quarter of 2012 by 16% compared to 2011, yet the company still increased revenue by 1%.

Sustained increases in titanium dioxide prices should benefit Kronos, while a collapse in prices would hurt the company. Is time on Kronos' side with respect to pigment prices?

Source: Ti Insight.

If the projections shown above are on target, titanium dioxide prices will continue to rise. There is a risk, though, that these increased prices could be problematic for Kronos at some point.

Dow Chemical (NYS: DOW) introduced a new polymer last year that could be an alternative to titanium dioxide. The company calls its EVOQUE polymer a "game-changer." In its second-quarter 2012 earnings announcement, Dow stated that several customers are using the new polymer to reformulate paints as part of an effort to improve the efficiency of titanium dioxide usage.

While some consumers will pursue alternatives like these, it seems likely that Kronos will reap the rewards of sustained titanium dioxide price increases over the next few years.

Prices (again)Titanium dioxide is used to whiten a variety of products, including coatings, plastic, paper, inks, foods, and cosmetics. The pigment is used in so many ways that its consumption is linked directly to gross domestic product.

We're talking about prices again. GDP is essentially a sum of the prices for any goods or services created by a country. If GDP grows over time, demand for titanium dioxide should increase at close to the same rate. So how much will GDP grow?

Source: International Monetary Fund.

No one knows for sure. However, the International Monetary Fund has estimated that much of the world will see solid GDP gains in the next few years. In particular, emerging markets in Asia and Latin America are expected to experience robust growth.

If the IMF projections are reasonably accurate, Kronos might not see strong demand in the near term since the company's primary markets are in the U.S. and Europe. However, Kronos has customers in around 100 countries across the world and is poised to benefit from emerging markets. The company would also benefit if the U.S. and Europe return to historical GDP growth levels.

Prices (for the final time)The third time is the charm. Price (yet again) is our final reason Kronos and its investors have time on their side. I'm referring in this case to the price of the stock.

Kronos shares trade at a trailing P/E of 5.5 and a forward P/E of 7.36. Those levels are well below the corresponding ratios for rival DuPont and in the same general vicinity as those for Huntsman.

The median analyst target 12-month estimate for the stock is $23. That represents a 25% increase from the current price.

The stock appears to have considerable room to run.

TimingWhile time should be on investors' side with Kronos, timing isn't. The stock could continue to suffer from lower demand with the European economic malaise and the U.S. recovery struggling on several fronts. If you're trying to buy at the lowest point, there is no way to be sure that point has arrived yet.

Regardless of timing, Kronos has several strengths -- increasing pigment prices, demand growing over the long run, an attractive valuation, and a nice 3.3% dividend yield. The Rolling Stones had time on their side but they couldn't get no satisfaction. Investors in Kronos just might be able to have both.